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Is Dropshipping Legal? A Guide to the Legal Risks (2024)

by California Digital News

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DISCLAIMER: These guides are for informational purposes only and do not constitute professional legal advice. See more below*

Starting a new business can require a lot of overhead costs for things like retail space and utilities. Even if you’re a small business owner who only sells products online, you can still incur expenses for storage space and shipping costs. A dropshipping business model can help you avoid a lot of these expenses. 

Dropshipping is a cost-effective way to run an ecommerce store, and it’s a legal, legitimate business model. Here are some tips for starting a successful dropshipping business.

Is dropshipping legal?

Yes, dropshipping is legal. It is a widely-used business model in which a retailer does not keep the products it sells in stock. Instead, the retailer transfers customer orders to a supplier or manufacturer, who then ships the products directly to the customer. Like in any business, you must adhere to local, national, and international laws regarding the sale of merchandise. 

As long as you do this, dropshipping usually is a low-risk business model with little personal liability risk. You may want to have a lawyer draft legal agreements with your dropshipping companies to clarify who has legal liability for issues arising during the sales process, the shipping process, and during customer usage.

Legal compliance

  • Copyright laws
  • Consumer protection laws
  • Truth in advertising laws
  • Tax and licensing laws

Here are some legal compliance issues to keep in mind when establishing your dropshipping business:

Copyright laws

A common question among new ecommerce vendors is: “Can I get sued for dropshipping?” Like any business, you could be sued for any of a host of reasons, and copyright violations are among them. You may be in danger of violating copyright law if your supplier is selling counterfeit goods to fulfill your customer orders. Proceed with caution and take any ethical concerns seriously.

Consumer protection laws 

Even if you aren’t the company making a product, your online business must abide by consumer protection laws and is responsible for the quality and safety of goods shipped to your customers. If your product hurts someone, you could face personal injury litigation, so you’ll want to carry product liability insurance.

Truth in advertising laws

You may not manufacture a product, but you’re still responsible for accurately representing it in your marketing efforts. If unhappy customers buy a deceptively marketed product in a retail store, they likely won’t sue the wholesale suppliers; they’ll probably sue the company whose name is on the box. The same is true of your dropshipping store. You’re responsible for accurately representing the goods you sell, and you’ll encounter legal issues if you mislead your customers.

Tax and licensing laws

Like any retailer, you must collect and remit applicable sales tax. You also must pay income tax. Many states require a business license or sales permit to operate a retail business. Consult the Shopify starting up guide and contact legal professionals in your area for the most up-to-date information on how to start different types of businesses in different municipalities. 

What is dropshipping?

Dropshipping is a retail fulfillment method where one company handles sales, marketing campaigns, and customer service, and a different company handles the manufacturing and fulfillment process. The dropshipping business model is particularly popular among ecommerce retailers that have online stores offering various products. 

When a customer places an order, a third-party supplier takes over. This outside supplier is the company that actually manufactures the product and sends it to the customer. In some cases, one outside company may make the product, and a different one ships it. Nonetheless, the company that sells the product to a consumer is not the one that makes the item or fulfills orders.

Why start a dropshipping business?

  • Low startup costs
  • No need to source materials
  • No warehousing or inventory management
  • No shipping headaches
  • Easier to develop products and change formulas
  • Ability to focus on what you do best

Running your online store as a dropshipping business offers several advantages over a traditional retail model, freeing you to focus on specific things and leaving other details to your dropshipping partners. The upsides to dropshipping include:

Low startup costs

In the dropshipping industry, you don’t need to lay out a lot of money to build up inventory, and you don’t have to pay for retail space. Your main expense is buying products from a dropshipping vendor, many of which can be purchased for just a little over the wholesale price. You can then sell these products to your customers for market value.

No need to source materials

When you partner with a dropshipping manufacturer, you don’t have to worry about raw materials or supply chains. Your partner handles things like price changes on materials and shipping logistics.


No warehousing or inventory management

Traditional retail stores, and even online stores, need space to stock inventory. When you outsource manufacturing, inventory management, and order fulfillment to a dropshipping partner, you offload these responsibilities.


No shipping headaches

Shipping comes with a lot of logistical challenges. A partner handles the dropshipping order fulfillment when you send them your customer orders.


Easier to develop products and change formulas

If you get into private label dropshipping, where an outside company makes a custom product on your behalf, you can save money on product development. You can also test multiple suppliers to see whose product best meets your standards. And if the existing product isn’t working out, it may be easier to switch dropshipping suppliers than develop a new product from scratch.


Ability to focus on what you do best

With manufacturing and order fulfillment off your plate, you can focus your online business on three crucial professional elements: marketing, the sales experience, and customer service. Your job is to do market research and attract customers. Once shoppers find your website, you can give them a great buying and checkout experience, and support them with great customer service.

How to get started dropshipping with Shopify

If you’d like to learn how to build a successful business around dropshipping, explore Shopify’s ultimate guide to dropshipping and a how-to guide for how to start a dropshipping store. You can then get more specific with tutorials on:

Dropshipping lends itself to a wide range of products. These include pet supplies, phone accessories, car accessories, beauty products, apparel, coffee, and baby supplies. These markets are filled with potential customers accustomed to buying products online, and vendors who know how to make and dropship these products.

* Please consult independent legal advice for information specific to your country and circumstances. Shopify is not liable to you in any way for your use or reliance on these guides.

This post is for information purposes only. You are responsible for reviewing and using this information appropriately. This content doesn’t contain and isn’t meant to provide legal, tax, or business advice. Requirements are updated frequently and you should make sure to do your own research and reach out to professional legal, tax, and business advisers, as needed. Your local state, province, or county will have different steps and requirements. To sell products using the Shopify platform, you must comply with the laws of the jurisdiction of your business and your customers, the Shopify Terms of Service, the Shopify Acceptable Use Policy, and any other applicable policies.

 

Dropshipping with Shopify Collective

Connect with US-based Shopify brands to easily sell their products. With Shopify Collective, you can curate items from like-minded stores and ship them directly to your customers.

Explore Shopify Collective

 

 

Is dropshipping legal FAQ

Do you need a business license for dropshipping?

A dropshipping business is a retail business. If your state or municipality requires a business license for retailers, you probably need one for your dropshipping store. Use Shopify’s starting up guide to learn more about specific legal requirements for starting a retail business in your state.

What are the drawbacks of dropshipping?

The principal drawback of dropshipping for sellers is that it usually has lower profit margins than traditional retail does. A large portion of every sale goes to the company that manufactures, warehouses, and ships the items you sell. You may also have less control over the products sold under your name. If the product is low quality, you may have limited options to improve it. The ensuing negative customer reviews may hurt your business’s reputation. And if your manufacturer ships a shoddy or dangerous product, you may face penalties for breaching consumer protection laws. Despite these drawbacks, many ecommerce vendors feel dropshipping is worth it.

What products are good for dropshipping?

Dropshipping lends itself to a wide range of products. These include pet supplies, phone accessories, car accessories, beauty products, apparel, coffee, cannabis products, and baby supplies. These markets are filled with potential customers accustomed to buying products online, and vendors who know how to make and dropship these products.

Do I have to collect sales tax on dropshipped items?

Yes. If your state or municipality charges sales tax on retail goods, you have to collect and remit that tax on items sold via dropshipping.

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